The marketplace business model

A marketplace brings two groups together: people who want something and people who offer it. The platform provides the meeting place, search, trust and payment. It usually does not make the product or hire the people who deliver the service. Flipkart and Meesho for goods, Urban Company for home services and Zomato and Swiggy for food are well-known Indian examples, though each runs differently in how much of the work it does itself.

Think of a traditional mandi or shopping street. The market owner provides the space and rules, sellers set up stalls, buyers walk in. An online marketplace does the same, with software.

Most marketplaces take a cut of each transaction, called a commission or take rate. If a buyer pays ₹1,000 and the platform keeps ₹150, the take rate is 15 per cent. The platform earns when a deal happens, not when someone merely visits.

Over time, platforms add other income. Sellers pay for ads to appear higher in search. They pay for storage and delivery services run by the platform. Some charge listing or subscription fees, and some earn from payments and loans offered to sellers. The mix differs by company and changes over time.

• Commission: a percentage of each sale.
• Advertising: sellers pay for better placement.
• Fulfilment fees: storage, packing and delivery.
• Subscriptions or listing fees: a fixed payment to be on the platform.
• Financial services: payments, credit and insurance for sellers or buyers.

A marketplace is useless to buyers without sellers and useless to sellers without buyers. Which should come first? This puzzle is the hardest part of starting one.

Founders solve it in a few ways. Many start in one city or one product type, so a small area gets dense enough to be useful. Some bring in sellers by hand, with their own funds or by doing the work themselves at first. Some pay buyers with discounts to come, then slowly reduce them. Subsidies can work, but they cost money, and buyers who came for a discount may leave when it ends.

A network effect means the service gets better as more people use it. More sellers give buyers more choice and lower prices. More buyers give sellers more sales. The result can be a leader that is hard to beat, because new rivals must attract both groups at once.

Not all marketplaces have strong effects, though. If buyers use several apps at once and sellers list everywhere, as happens often, the platform has a weaker hold. Our guide on network effects explains the types in more detail.

Marketplaces are grouped by what they trade and by who the users are. Goods marketplaces sell products. Service marketplaces list people who do jobs, such as cleaners, tutors and freelancers. Others trade money, like lending platforms, or space, like home rentals. Some link businesses to each other, such as platforms for buying raw materials or farm produce.

They also differ in how much they control. In an open marketplace, the seller handles price, packing and delivery. In a managed marketplace, the platform sets quality standards, trains providers, fixes prices and often handles customer support. Managed models earn more per order and give a steadier experience, but cost more to run.

An inventory-led business buys goods, holds stock and sells them at a markup. A marketplace holds no stock of its own, or little. This keeps the starting cost lower and the product range wide. The trade-off is less control: the platform depends on others for quality, stock and delivery, so a bad seller can hurt its reputation.

Some companies mix both. They run a marketplace and also sell their own labelled goods or hold stock in warehouses for faster delivery. Rules on foreign investment in e-commerce limit what some foreign-funded platforms can do on inventory. Check current policy, because the rules have changed over time.

The biggest is disintermediation, where a buyer and seller meet on the platform and then deal directly to skip the commission. Service marketplaces see this a lot. Another is quality: fake products, poor service and returns damage trust. Competition from rivals who spend heavily on discounts also drains cash.

There are rule risks too. Indian law holds e-commerce platforms to duties on seller details, grievance handling and consumer protection, and platforms collect tax at source on sellers' sales under GST rules. Companies must also follow data protection law. This guide is general information and not legal or tax advice, so check with a professional.

They look at gross merchandise value (GMV), the total value of goods sold through the platform, and at net revenue, which is what the platform keeps. They check the take rate and whether it is rising or falling, the share of repeat buyers, the number of active sellers, and how much of the growth was bought with discounts. Our guide on GMV versus revenue explains why the two numbers differ so much. A marketplace that shows buyers returning without discounts is stronger than one that needs a new offer every month.